DeFi is such a hot topic right now within the cryptocurrency industry - especially with Compound Finance, one of the largest DeFi platforms, distributing its COMP token to take the entire USD value locked up in DeFi up to the $1.5 billion level;
However, what exactly is DeFi? And what are all of these versions of Wrapped Ether (WETH) & Wrapped Bitcoin (WBTC) surrounding lots of these DeFi protocols?
Well, if you have been wondering these questions then read on because you are about to learn about the next trend that is about to cause the cryptocurrency world to explode in growth.
What is Wrapped Ether (WETH)?
If you are reading this, you are already familiar with the ETH token itself. It's the token called Ether, which is the base currency of the Ethereum blockchain.
Then we have ERC-20 standard, which allows the creation of other tokens atop of Ethereum. Well-known examples of an ERC-20 token are $LINK, $DAI, or $BAT.
The thing is, the ETH token itself was created before the ERC-20 token standard came alive and, therefore, it is not ERC-20 compatible. This means that ETH itself cannot be used in many DeFi platforms as they are built to allow the ERC-20 infrastructure.
As a solution to this weird problem, developers came up with the concept of “Wrapped Ether (WETH)”.
Wrapped Ether is an ERC-20 token version of ETH that is compatible within many defi projects. As WETH is ERC-20 compatible, this means that DeFi platforms now have the opportunity to tap into the vast liquidity that Ether has to offer through the WETH token.
To get WETH users simply have to deposit ETH into a smart contract. This smart contract will hold the ETH and provide WETH on a 1:1 basis. The users will then be free to take this WETH and use it within the DeFi industry. The ETH will remain locked up in the smart contract until the owner comes back to repay the WETH debt and reclaim his ETH.
In reality, you aren’t really actually ‘wrapping’ anything. Instead, you are pretty much just swapping your ETH for WETH through a smart contract on a 1:1 basis.
Where to swap ETH for WETH?
What Is Wrapped Bitcoin (WBTC)?
Wrapped BTC is an ERC-20 compatible version of Bitcoin. It allows for the DeFi industry to take advantage of the liquidity provided by Bitcoin through the ERC-20 token WBTC.
WBTC was actually the first synthetic ERC-20 version of Bitcoin launched in January 2019. It is 100% fully verifiable and backed on a 1:1 ratio with BTC. The great thing about WBTC is that there is proof of reserves that are hashed on the Bitcoin network itself.
The entire process works through the three entities on the wBTC ecosystem which are;
- Custodians - Control the keys to be able to mint new wBTC tokens
- Merchants - A party which issues or burns wrapped tokens and help to distribute the wBTC
- Users - People who would like to deposit their BTC to get wBTC
It works by users requesting tokens from a merchant. The merchant has to perform the KYC and AML procedures to verify the user’s identity. After the identity is confirmed and the user has sent some BTC, the merchant will then request for some wBTC to be minted.
wBTC’s are minted by custodians who actually hold all the BTC that is backing the wBTC. The merchant will send the BTC to the custodian who in turn has the keys to let them mint wBTC from the wrapped token smart contract. Once the wBTC is minted, it is sent to the merchant who, in turn, sends it to the user.
When a user wants to redeem their BTC, the wBTC that they borrowed has to be burnt. This can only be done by the merchant address. The wBTC is sent to the merchant who then burns it in the wrapped token contract. This is then confirmed by the custodian of the BTC who sends the BTC to the merchant after the burning process is complete. When the wBTC is burnt, it is done so on-chain and is removed from the merchant balance. The merchant will then send the BTC back to the user.
There are currently around 5175 WBTC in circulation that is backed by over 5234 BTC. This is over $50 million in USD value;
Where to get WBTC?